The manufacture of folic acid is a competitive business. A new plant costs $100,000 and lasts for three years. The cash flow from the plant is as follows: year 1: +$43,300; year 2: +$43,300; and year 3: +$58,300. (Assume no taxes.)If the salvage value of the plant at the end of year 1 is $80,000, should you scrap the plant at the end of year 1?
A)Yes
B)No
C)More information is needed.
D)I don't know.

Question

Quizplus · Accepted Answer

The net cash flow if the plant is scrapped at the end of year 1 is $43,300 (year 1 cash flow) + $80,000 (salvage value) = $123,300. If the plant is not scrapped, the total cash flow over three years is $43,300 + $43,300 + $58,300 = $144,900. Since $144,900 is greater than $123,300, it is better not to scrap the plant.

The Manufacture of Folic Acid Is a Competitive Business